Breakingviews-Wall St could learn a thing or two from Detroit

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(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)

By Antony Currie

NEW YORK, Jan 3 (Reuters Breakingviews) - Wall Street could
learn a thing or two from Detroit about getting the business
back on the road. Both needed government aid in 2008. But it is
the automakers that have restructured and become decently
profitable in straitened times. Motown’s chiefs can more easily
justify big pay days too.

Uncle Sam attached more strings to bailing out General
Motors (GM.N) and Chrysler than it did to the likes of Bank of
America (BAC.N) and Citigroup (C.N). The two Motown
manufacturers had to slash dealerships and brands and cut
factory worker pay to the same levels as foreign rivals. Ford
(F.N) took similar measures, too.

Banks also restructured by shedding assets and businesses,
but not as much. And as the fifth anniversary of the bailouts
approaches, most of the bulge bracket U.S. investment banks are
only eking out single-digit returns on equity. That’s well below
the rule-of-thumb cost of capital of 10 percent.

Detroit, meanwhile, is cranking out cash. General Motors’
pre-tax margin in North America is a healthy 8 percent or more
while Ford routinely bests 10 percent – a level once reserved
for the best luxury carmakers.

So what can the Motor City teach Wall Street? First, that it
pays to make swift strategic decisions on product lines. Only
Swiss bank UBS UBSN.VX has taken the real bold step of
shutting down whole swaths of fixed-income trading. And that was
hardly a decision taken quickly.

Second, banks have to learn that compensation needs to fit
the environment. Investment bank bonuses are lower than before
the crisis on an absolute basis, but still hover around 40
percent of revenue. Reducing that would give an immediate boost
to ROE. Goldman Sachs’ (GS.N) would jump from 8.8 percent to
12.3 percent for the first nine months of the year if pay fell
by a quarter, to about one-third of revenue.

Putting shareholders first has its own rewards, too. Ford
Chief Executive Alan Mulally and Executive Chairman Bill Ford
took home $43.5 million between them last year, or 0.55 percent
of net income. Applying the same metric would double pay to $24
million for Goldman’s Lloyd Blankfein. JPMorgan’s (JPM.N) Jamie
Dimon, meanwhile, would net around $100 million, almost five
times his 2011 reward.

It’s unlikely a bank will be able to hand over that much
again for a long time. But it illustrates that despite the
challenges they still face, especially on Europe, Detroit’s Big
Three have responded to the challenge much better than Wall
Street.

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